BaFin: The “cryptocurrency watchdogs” are now also monitoring issuers

BaFin triggers next stage of EU crypto regulation

The basis for all innovations is EU regulation on markets for crypto assets (Markets in Crypto-Assets Regulation — MiCAR for short), which came into force in 2023. It is part of an EU package for digitizing the financial sector and is intended to create a harmonised European regulatory framework for crypto assets, combat money laundering and protect consumers. MiCar consists of several “titles” that are valid at different times.

Cryptocurrency transactions in Germany have been regulated by the Federal Financial Supervisory Authority (BaFin) since January 1, 2020. Since then, platforms that trade or store Bitcoin, Ether and other cryptocurrencies have required a BaFin license. Since at the end of June 2024, titles III and IV of the Markets in Crypto Assets Regulation (MiCAR) have become legally effective throughout the EU, supervises the Federal Financial Supervisory Authority BaFin Now also the issuers of so-called asset-refinanced tokens and e-money tokens.

MiCA differentiates this based on the reference value: If the value of a token relates exclusively to a specific official currency — such as the US dollar — then this is qualified as an e-money token. If the reserve of the crypto asset consists of either no official currency or of several assets, of which one or more assets may also be an official currency, the crypto value will be classified as an asset-referenced token.

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Which crypto assets are affected

In total, MiCar defines three types of crypto assets:

• Title III of MiCAR regulates asset-referenced tokens (asset referenced token, ART). These are crypto assets whose stability is not based on a currency but on other values, such as gold. In principle, issuers of ART require approval from their national supervisory authority. In addition, they must be based in the EU and are required to prepare a white paper that contains key information about the issuer and the issued crypto value and is checked in advance by BaFin.

• Title IV of MiCAR concerns issuers of e-money tokens. In a legal sense, this is a new class of digital money. E-money tokens are a digital representation of fiat money (such as euros or US dollars). Such a token must fulfill two characteristics: It must appear stable in value because it relates to the value of an official currency and it must use technology such as Distributed Ledger (DLT).

• Other tokens: These include cryptocurrencies as well as utility tokens, which grant their holders the right to purchase certain goods or services. Auch NFT (Non-Fungible Token), which caused a sensation in 2021 primarily thanks to digitized art by “Beeple”, fall into this category.

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However, only titles lll and lV fall under the new regulation of June 30, 2024. For “Other tokens”, the new regulation will only take effect from December 30, 2024. Security token for “denomination” of digital assets, such as from FINEXITY are, by the way, not affected by the new BaFin legislation. They already fall within the scope of EU regulation on financial instruments, which is regulated in Germany in particular by Securities Trading Act (WpHG) is fixed.

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Effects on the crypto market and investors

As a result of the gradual implementation of these MICAR requirements, token issuers are now also being more strictly controlled and required to comply with strict transparency and security standards. This offers many benefits. For example, more private and institutional investors could gain confidence in the market for crypto assets, which has repeatedly suffered damage to its image in recent years. In the long term, this could lead to a more stable and robust crypto market, which will become more attractive to both private and institutional investors.

At the same time, however, the regulations also mean significant additional expenses and higher costs for token issuers. The preparation of a white paper that requires approval and compliance with extended due diligence requirements require specialized expertise and more resources. Smaller market players may not be able to meet these requirements, which is likely to result in consolidation.

Until the MICAR regulation comes into full force, financial service providers should use the time to familiarise themselves with the regulations and drive forward technical developments. It may also be advisable to conclude alliances with experienced partners who have extensive expertise in combining analog and digital financial products. As soon as the MICAR regulation is fully effective, they can be well prepared and provide investors with high-quality offers that take full advantage of the opportunities of digitization and tokenization.

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